Bankruptcy and plan loans

[katieinny]

We know that loans from a qualified retirement plan cannot be included in a participant's list of creditors that he wants to write off. However, apparently his lawyer doesn't know that and included the plan loans (2) anyway. The plan administrator received a notice from the US Bankruptcy Court.

Does the plan administrator need to respond to the notice? There is a deadline to file a "complaint objecting to discharge of the debtor or to determine dischargeability of certain debts." The instructions say that if a creditor believes that the debtor is not entitled to receive a discharge you must start a lawsuit by filing a complaint in the bankruptcy clerk's office. I can't believe that the plan would have to go that far.

[masteff]

If you got the same bankruptcy notice I'm thinking of... we generally took that as notice to stop withholding loan payments from the participant's pay.

Our legal counsel always told us to send the participant and the attorney a copy of the special tax notice w/ a note directing them to the section on the tax consequence of defaulted loans.

[katieinny]

Hmm, I thought that payroll deductions to repay the plan loan could not be suspended, even if the participant demands it.

[masteff]

Hmm, I thought that payroll deductions to repay the plan loan could not be suspended, even if the participant demands it.

My bad.... forgot about the bankruptcy reform act that was passed a couple years ago.... see this thread.... http://benefitslink.com/boards/index.php?s...ankruptcy++loan (Actually, I think the plan could allow the deductions to be stopped but that's a different discussion.)

Back to your original question... I've never heard of a plan sponsor responding to one of those notices. We certainly were never told to by outside counsel.

[katieinny]

We've asked the client to talk with a bankruptcy attorney to find out if they need to respond to the notice. If I ever get an answer, I'll let you know.